Credit, Not Custody, the Biggest Challenge in the Crypto Space

In this highlight from the Profit & Loss video interview with David Mercer, CEO of LMAX Exchange Group, Mercer says that a lack of credit, rather than custody solutions, is the biggest single challenge facing institutional market participants wanting to trade cryptoassets.

LMAX Exchange Group recently launched LMAX Digital, the institutional crypto currency exchange, which also offers a crypto custody solution. Mercer concedes that having platforms provide custody services is not necessarily ideal from a market structure perspective.

However, he quickly adds: “If you look at LMAX Exchange’s business model it has always been regulated as a broker-dealer and as an MTF. There are Chinese Walls between the two entities. The broker-dealer always sits on client funds, I sit on a quarter of a billion dollars of client funds today that transacts on the LMAX Exchange MTF. So the custody of coin is just the same as that business model: I will have a regulated digital broker and a regulated digital exchange, so it’s natural that we have to have a custody solution.”

Mercer says that if banks do end up offering custody services for cryptoassets, then LMAX Digital is happy to work with them, but also points out that the market could evolve towards a market structure like that of equities or futures, where trades are executed on exchanges and cleared by clearing houses.

“In the meantime, we have to deal with the cards that we’re dealt and that means that we do everything,” he comments.

Mercer continues: “I’d say it’s a level above custody actually, credit is the biggest issue I see in the marketplace today, and that’s not necessarily something that I can solve because I’m not going to have the balance sheet that lends that credit, the PB style balance sheet.”

In the full video interview with P&L (see below) Mercer also discusses some of the key differences between the traditional FX market and the crypto space, arguing that both can learn lessons from each other.

“First let’s look at what we can learn from crypto currency trading platforms,” says Mercer. “They have done a phenomenal job, the evangelists out there, in selling and marketing this space. They should not be criticised for some of the technical difficulties they may have had because there simply was a gold rush, especially last summer, where platforms were opening up 100,00, 150,000 accounts a day so they can learn nothing from us on that. On sales and marketing they can learn nothing.”

He adds: “The high-level maths and cryptography – they have that covered – but I think what they can learn from the fiat side is that liquidity is king, to pay respect to liquidity, and liquidity begets flow and is a self-fulfilling circle. They need to respect LPs and be sure that they can provide it in all of their assets that they list.”

Mercer also talks about the launch of LMAX Digital and how his firm differentiates itself from other platforms targeting institutional market participants in the crypto space.